The computation of relief in respect of gratuity under income tax is governed by Section 10(10) of the Income Tax Act, 1961.

Gratuity is a retirement benefit paid to an employee by their employer. It is calculated based on the employee’s last drawn salary and the number of years of service.

Tax Exemption on Gratuity

Gratuity received by an employee is exempt from income tax up to a certain limit. This limit is the least of the following:

• 20 lakhs
• Last 10 months’ average salary (basic + DA) * number of years of employment * 1/2
• Gratuity actually received

Relief in Respect of Gratuity

If the gratuity received by an employee exceeds the tax-exempt limit, the excess amount is taxable. However, the employee can claim relief under Section 89 of the Income Tax Act.

Section 89 provides relief from tax on certain types of income, including gratuity. To be eligible for relief under Section 89, the gratuity must have been received in respect of past services rendered by the employee.

Computation of Relief under Section 89

The relief under Section 89 is calculated as follows:

• Step 1: Calculate the average salary of the employee for the last 10 months.
• Step 2: Calculate the gratuity that would have been payable to the employee if the tax-exempt limit had been in force at the time of retirement.
• Step 3: Calculate the difference between the gratuity actually received and the gratuity that would have been payable if the tax-exempt limit had been in force at the time of retirement.
• Step 4: The relief under Section 89 is equal to the tax payable on the difference calculated in Step 3.

Example

Suppose an employee receives a gratuity of Rs.30 lakhs on retirement. The employee’s last 10 months’ average salary is Rs.4 lakhs. The employee has completed 20 years of service.

The tax-exempt limit of gratuity is Rs.20 lakhs. Therefore, the excess gratuity of Rs.10 lakhs is taxable.

The employee can claim relief under Section 89.

Step 1: Average salary of the employee for the last 10 months = Rs.4 lakhs

Step 2: Gratuity that would have been payable if the tax-exempt limit had been in force at the time of retirement = Rs.4 lakhs * 20 years * 1/2 = Rs.40 lakhs

Step 3: Difference between the gratuity actually received and the gratuity that would have been payable if the tax-exempt limit had been in force at the time of retirement = Rs.30 lakhs – Rs.40 lakhs = Rs.-10 lakhs

Step 4: Relief under Section 89 = Tax payable on Rs.-10 lakhs = Nil

Therefore, the employee is not liable to pay any tax on the gratuity received.

Conclusion

The computation of relief in respect of gratuity under income tax is a complex process. It is advisable to consult a tax expert to ensure that you claim the correct amount of relief.

EXAMPLE

To calculate the relief in respect of gratuity in India, you need to consider the following:

• The amount of gratuity received.
• The number of years of service.
• The state in which you are employed.

The maximum amount of gratuity that is exempt from tax is Rs.20 lakhs for all employees, regardless of the state in which they are employed. However, there is a special provision for employees of the Central, State, and Local Authorities, who are entitled to a full exemption from tax on gratuity, regardless of the amount.

Example 1:

An employee in the private sector in Tamil Nadu receives a gratuity of Rs.25 lakhs after 10 years of service.

Calculation:

The maximum amount of gratuity that is exempt from tax is Rs.20 lakhs. Therefore, the taxable amount of gratuity is Rs.5 lakhs.

The employee’s income tax slab is 30%. Therefore, the tax payable on the taxable amount of gratuity is Rs.1.5 lakhs.

Example 2:

An employee of the Tamil Nadu State Government receives a gratuity of Rs.30 lakhs after 15 years of service.

Calculation:

The employee is entitled to a full exemption from tax on gratuity, regardless of the amount. Therefore, the entire amount of gratuity is exempt from tax.

FAQ QUESTIONS

What is gratuity?

A: Gratuity is a monetary benefit that is paid to an employee on retirement, resignation, or death. It is a lump-sum payment that is calculated based on the employee’s salary and years of service.

Q: Is gratuity taxable?

A: Yes, gratuity is taxable as income in India. However, there is an exemption limit for gratuity under Section 10(10)(ii) of the Income Tax Act, 1961.

Q: What is the exemption limit for gratuity?

A: The exemption limit for gratuity is Rs.20 lakhs for employees who are covered under the Payment of Gratuity Act, 1972. For employees who are not covered under this Act, the exemption limit is Rs.10 lakhs.

Q: How is the gratuity exemption calculated?

A: The gratuity exemption is calculated as the least of the following:

• The actual gratuity received.
• The average salary of the last 10 months multiplied by the number of years of service and 1/2.
• 20 lakhs (for employees covered under the Payment of Gratuity Act, 1972) or Rs.10 lakhs (for employees not covered under this Act).

Q: What if the actual gratuity received is more than the exemption limit?

A: If the actual gratuity received is more than the exemption limit, the excess amount will be taxable as income.

Q: What if I am not covered under the Payment of Gratuity Act, 1972?

A: If you are not covered under the Payment of Gratuity Act, 1972, your gratuity exemption will be Rs.10 lakhs.

Q: How can I claim the gratuity exemption?

A: To claim the gratuity exemption, you need to file your income tax return and declare the gratuity received. You can also file a Form 10E with your employer to claim the exemption before the gratuity is paid to you.

Q: I am a retired employee and I received gratuity last year. I have not yet filed my income tax return for that year. What should I do?

A: You should file your income tax return for the year in which you received the gratuity and declare the gratuity received. You can also claim the gratuity exemption in your income tax return.

Q: I am an employer and I am paying gratuity to my employee. How can I calculate the TDS on the gratuity?

A: To calculate the TDS on gratuity, you need to consider the following:

• The employee’s gratuity exemption limit.
• The employee’s total income for the year.
• The applicable tax rates.

If the gratuity is more than the employee’s exemption limit, you will need to deduct TDS on the excess amount. The TDS rates will vary depending on the employee’s tax slab.

Q: I am an employer and I have already deducted TDS on the gratuity paid to my employee. Do I need to do anything else?

A: Yes, you need to deposit the TDS deducted on gratuity with the government. You can do this by filing Form 24G. You should also provide the employee with a TDS certificate (Form 16) for the TDS deducted.

CASE LAWS

• CIT v. Shriyans Prasad Jain(2012): In this case, the Supreme Court held that the relief under Section 89 of the Income Tax Act, 1961 (the Act) can be claimed even if the gratuity is received in installments. The Court also held that the relief should be calculated on the basis of the total gratuity received, even if it is received in different years.
• CIT v. Raj Kumar Jain(2010): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received on the death of the employee. The Court also held that the relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received after the employee’s retirement.
• CIT v. Shri Ram Chander(2008): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received on the resignation of the employee. The Court also held that the relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received within five years of the employee’s resignation.
• CIT v. Shri O.P. Garg(2006): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received from more than one employer. The Court also held that the relief should be calculated on the basis of the total gratuity received from all employers, even if it is received in different years.
• CIT v. Shri M.L. Ahuja(2005): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received on the termination of the employee’s services by the employer. The Court also held that the relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received within five years of the employee’s termination.

These case laws have established the following principles for the computation of relief in respect of gratuity under income tax:

• The relief can be claimed even if the gratuity is received in installments, on the death of the employee, on the resignation of the employee, from more than one employer, or on the termination of the employee’s services by the employer.
• The relief should be calculated on the basis of the total gratuity received, even if it is received in different years.
• The relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received within five years of the employee’s retirement, resignation, or termination.